Did you know that more and more people are including planned giving in their financial planning, in order to provide long-term support for causes they really care about?
Here are a few frequently asked questions related to planned giving and answers to guide you through the process.
This FAQ is presented by LEAVE A LEGACYTM Québec, an awareness program which aims to promote planned gifts, more specifically charitable bequests.
1. What is a planned gift?
In the broadest sense, the term “planned gift” refers to any gift that has been the subject of financial, tax or estate planning.
According to the Canadian Association of Gift Planners (CAGP), a planned gift is the culmination of a process of planning charitable gifts, whether immediate or future, that reflects the desires and philanthropic goals of the donor and takes into account his or her personal, family and tax situation.
2. How do planned donations differ from annual donations?
Annual donations are considered immediate and are generated through large-scale campaigns by organizations to meet the financial objectives of the current year. They are generally made with the donor’s current cash flow. The organization is required to spend a significant portion of these donations in the year they are received. Planned donations are not subject to this law.
Planned gifts, which are often referred to as deferred gifts, are mostly substantial donations made using part of one’s assets (property, capital, life insurance policies), which are usually not received until after the donor’s death. They are generated through targeted campaigns by organizations, for medium- and long-term funding purposes.
3. What are the different types of planned gifts?
A planned gift can take many forms: the most well known are charitable bequests, gifts of life insurance, charitable annuities, charitable trusts, gifts of securities and real estate. Each has different tax advantages.
4. What are the main characteristics of a planned gift?
A planned gift is substantial, immediate or deferred, and made from the donor’s assets.
It reflects the desires and philanthropic goals of the donor.
It takes into consideration the donor’s personal, family and tax situation.
5. A planned gift: a gesture from the heart that’s also carefully considered!
Planning a donation is first and foremost a gesture from the heart. But it is nevertheless important to understand the tax rules that will apply. The better a planned gift is structured, the greater its impact will be.
We recommend you contact a professional advisor to find out what type of donation is best for your personal and family situation.
6. What are the steps to planning a gift?
1. Choose a charitable organization. Think of a charitable organization or a cause that you would like to support. Charitable organizations must be registered with the Canadian Revenue Agency (CRA). To check, call 1 888 892-5667 or visit www.cra-arc.gc.ca. You can also consult the Directory of LEAVE A LEGACYTM Québec partner organizations.
2. Gather information on the organization of your choice. What is its mission and accomplishments, what are the possibilities concerning donations and how can your donation help them attain their objectives. Make sure that you use the organization’s complete official name (legal name). Also ascertain the possibility of associating the name of a loved one to a donation, in order to perpetuate their memory, if desired.
3. Evaluate your personal balance sheet. Make a list of all your assets to determine the approximate value of your estate
4. Consult an advisor. A legal or financial advisor will help you choose the assets to use in making your donation (cash, insurance, property) in order to maximize your tax benefits. Choose an advisor who works in fields such as accounting, law, insurance or financial planning.
5. If you wish, inform the charitable organization and your family of your decision.
7. Do I have to be wealthy to plan a gift?
Charitable bequests are generated from the donor’s assets, which include their personal residence, savings, life insurance, pension and retirement funds, RRSPs, RRIFs and other possessions. Most people leave an inheritance, even if their assets are very modest. The important thing is to plan a donation according to your means with the help of an advisor. It is often through the accumulation of such charitable bequests that organizations can accomplish their mission.
8. How will my gift be structured in my will?
A notary will draft the clauses according to your wishes and ensure their accuracy. Here are two examples:
- Specific bequest (a designated amount of money or asset):
I bequeath to………………………………………., a registered charitable organization with its head office located at………………………………………………………, (a specific amount, an RRSP account, a RIF account or a designated asset) to support its mission.
- Residuary bequest (all or a percentage of the remainder of your estate after the payment of debts and specific bequests):
I leave to, ……………………………, a registered charitable organization with its head office located at…………………………………………, all or ….% of the remainder of my estate after the payments of my debts and specific bequests.
9. Should my will be drawn up with the help of a notary?
You can draft, date and sign your will yourself, by hand (holographic form). You can also type it or prepare it using word processing software and sign it in front of two witnesses.
However, a notarized will has many advantages. By doing so, it will not be necessary for the will to be probated in court, thus reducing fees and delays. In addition, a registered will can’t be lost or destroyed.
10. Should I inform the charitable organization about my gift?
That decision is up to you. However, organizations generally like to know that you are leaving them a gift. This way, they can express their appreciation to you and tell you how they intend to use your donation. Your action will then become more concrete, and you will experience the sense of fulfillment that results from it.
11. Why plan a gift?
People who make a planned gift are generally motivated to do so for altruistic reasons. The main motivations of Quebecers are:
- The belief they are contributing to an important cause
- Personal or family history
- The existence of few or no heirs
- The availability of funds
- Gratitude towards an organization
- Community involvement (volunteering)
- The desire to make a gesture that will outlive them
- Gratitude towards an organization
- Contribution to a better future
- Tax benefits.
Sources: 2017, 2011 and 2005 CROP studies, and a 2000 survey conducted by LEAVE A LEGACYTM Québec.
12. Who makes a planned gift?
A common misconception people have is that you have to be wealthy and not have close family or friends to make a planned gift. Yet, under half of Quebecers believe that it is not necessary to be rich to make a planned gift and that it is possible to provide for the future of their loved ones while also making a planned gift to a charitable organization.
Sources: 2017, 2011 and 2005 CROP studies, and a 2000 survey conducted by LEAVE A LEGACYTM Québec.
13. How do I leave a significant gift to an organization that is important to me?
The easiest way is by making a charitable bequest. You can leave a specific amount, a percentage or the remainder of your estate, the whole or partial proceeds of a life insurance policy or any other property to a charitable organization.
Several types of planned donations that offer immediate tax benefits can be arranged during your lifetime: listed securities, charitable annuities and charitable trusts.
14. What is a charitable bequest?
Once you secure the well-being of your family and loved ones, you may choose to include in your will a significant donation to one or several charitable organizations. If important changes occur in your life, you can always modify your will according to your situation.
A charitable bequest continues to be one of the simplest and most accessible ways of planning a gift. There are several available to you:
- Specific bequest (a designated amount of money or asset)
- Residuary bequest (all or a percentage of the remainder of your estate after the payment of debts and specific bequests)
- Designation of a contingent beneficiary in the event of the death of the primary beneficiary
- Universal bequest (all of the assets, sometimes divided among many beneficiaries)
- Designation of a beneficiary of an RRSP, RRIF or life insurance policy
- Designation of a charitable organization as the beneficiary in the event of the death of all the beneficiaries at the same time.
In each case, a tax receipt will be issued that can be used when reporting the donor’s income following his or her death or claimed on the estate’s tax return within the time limits prescribed by law. The fiscal advantages from charitable bequests can dramatically reduce the taxes to be paid out by the estate.
15. What are the advantages of a charitable bequest?
The most common form of planned giving is the charitable bequest. More specifically, a charitable donation provided for in a notarial will is a guarantee that your last wishes will be respected. Furthermore, the notarial will avoids the delays or costs of a probate process, which is mandatory in the case of a holograph will or a will prepared in front of witnesses.
It allows you to support the mission and services of an organization you care about beyond your lifetime through a variety of means, including a specific bequest (a fixed amount or an identifiable asset) or a residuary bequest (all or a percentage of the remainder of the estate after the payment of all debts and specific bequests). Your financial advisor can help you decide which is best for you. You may also designate an organization as the beneficiary of a life insurance policy or pension plan.
A charitable gift is eligible for non-refundable tax credits in the neighbourhood of 50% of the value of the donation, which can significantly reduce the taxes to be paid out by the estate.
16. Do I need to state my intention to make a posthumous charitable donation in my will?
A proper will is a guarantee that your wishes will be respected. If you want your gift to be earmarked for a specific project or purpose, it is recommended that you contact the organization ahead of time to verify the feasibility of your wish.
17. Can my charitable bequest penalize my heir(s)?
After providing for the well-being of your family and loved ones, you can bequeath a percentage of your assets or the remainder of your estate to one or several charitable organizations. Certain charitable bequests can significantly reduce the fiscal burden of your estate, especially in the absence of a spouse.
It is also possible to take out a life insurance policy to replace the part of the estate bequeathed to a charity. The tax credits eligible for a receipt reduce the financial impact of the donation by approximately 50%, but do not cancel it.
18. How do I leave a gift in memory of a person or for a specific cause?
A gift to a charitable organization is a wonderful way to preserve the memory of someone dear to you. You can mention that the gift is made in that person’s memory in your will and to the organization.
After consulting the organization, you may also make a charitable bequest to set up an endowment fund named after the person you wish to honour. This donation will be allocated to a project or activity for a period of time according to your financial and estate plan.
19. What is a gift of a life insurance policy?
There are various ways of making a gift of life insurance. The type of gift will depend on your objectives, age and family situation.
Regardless of the type of gift you make, a life insurance policy makes it possible to make a substantial gift while protecting the inheritance of your heir(s), and it can generate significant tax savings for the donor or the estate.
20. What are the types of life insurance gifts?
Donation of an existing policy If you no longer need the protection of your life insurance policy, you can surrender it to a charitable organization and continue to pay any premiums still owing, if applicable. You must designate the organization as the beneficiary and owner of your policy. You will receive a tax receipt for the cash surrender value of the policy and a receipt each time you pay your premium if you keep the policy in force.
Purchase of a new policy If you wish to make a significant donation but have limited means, you can purchase a life insurance policy and transfer it to a charitable organization. In this case, it is always preferable to spread out the payment of the premiums over a limited period of time, for example three, five, seven or ten years. Each premium paid is eligible for a donation receipt equal to the amount of that premium.
Designation of a charitable organization as the beneficiary of the death benefit If you anticipate that your estate will be left with a heavy tax burden, it may be more advantageous for you to simply name the organization as the beneficiary of your policy, in whole or in part, while remaining its owner. This way, the donation will be finalized upon the death of the donor and the fiscal savings will be awarded when the estate is settled. In this case, you will not receive tax receipts for the premiums paid during your lifetime.
21. Are gifts of eligible securities, such as publicly traded shares, advantageous?
This type of donation is advantageous if you transfer the securities directly to the charitable organization as opposed to donating the proceeds of their sale. Both the CRA (Canada Revenue Agency) and Revenu Québec have eliminated the tax payable on capital gains when securities are transferred to a registered charitable organization.
22. What is a gift of eligible securities?
Gifts of publicly traded shares, bonds, mutual fund units or other similar securities are one of the most fiscally advantageous ways to make a substantial donation to a charitable organization, because donations of shares or other securities are eligible for a tax credit. It is more advantageous to transfer securities directly than to donate the proceeds from the sale of securities. This type of donation is suitable for those who wish to make a substantial donation without encroaching on their liquid assets or for those who own shares or other securities whose value has increased significantly since they were acquired, as the transfer of the securities to an organization is exempt from capital gains tax.
23. What is a gift of real estate?
You can donate one or more residences to a charitable organization. You will receive an income tax receipt for the market value of your property. If real estate assets other than the primary residence are donated, 50% of the capital gains amount is taxable.
24. What is a charitable trust?
Creating a charitable trust allows you to make a substantial irrevocable gift while continuing to receive income generated from the asset you are transferring (such as personal wealth or a rental property). The trust manages the asset until your death, at which time it will be transferred to the designated charitable organization.
Setting up such a trust entitles you to a donation receipt in your lifetime for the actualized value of the future gift.
25. How does a charitable trust work?
A charitable trust is a gift of a significant asset to a charity, but it is deferred because the donor retains the usufruct for life or for a pre-determined period of time. When the trust expires, the trust administrator transfers the assets to the charitable organization. Tax receipts are issued at the time of the donation for an amount that represents the actualized value of the assets when the trust expires.
26. What is a charitable gift annuity?
A charitable gift annuity is an agreement in which you transfer an amount to a charitable organization, which in turn pays you an annuity (income) for the rest of your life and possibly, if you wish, that of your spouse (joint and survivor annuity). The annuity is based on the amount of the capital transferred and the life expectancy of the beneficiary or beneficiaries.
According to a CRA tax requirement, a maximum of 80% of your donation amount may go towards the purchase of the annuity. The remaining 20% or more is then the actual gift for which a receipt is issued, which will often cancel the taxable portion of the annuity, if there is one. Taxes on your annuity income, if any, will be low.
This can be an especially appealing formula for individuals aged 70 or older, as it provides them with a guaranteed fixed income for the rest of their lives while giving them the satisfaction of knowing that their donation is supporting the cause of their choice.
A charitable annuity can be issued directly through the charitable organization or through an insurance company. The charity you choose will provide you with more information.